Forex
Analysis-After battle with yuan bears, China is now keen to avoid sharp currency gains
SHANGHAI (Reuters) – Having spent all year trying to put a floor under the tumbling yuan, China’s central bank is suddenly faced with the opposite problem and is turning to subtle ways to stop the currency from appreciating sharply.
The usually restrained yuan has strengthened 1.3% against the dollar in August, recouping nearly all its losses in the first half of the year. On Friday, it looked set for its fifth straight weekly gain, the longest winning streak in more than three years.
While none of the underlying drivers at home, namely a weak economy and capital flight, has changed, the yuan has been helped by growing bets for Federal Reserve interest rate cuts, which are weakening the dollar, and by a rally in the Japanese yen.
Meanwhile, Chinese authorities have worked behind the scenes to ensure the currency doesn’t spike abruptly, which could roil fragile domestic financial markets and hurt exporters. They have surveyed the market to gauge the pressure, and quietly relaxed restrictions on imports of gold and trading positions in the yuan for some banks.
“The government is probably less concerned about depreciation but remains wary of FX volatility,” said Gary Ng, senior economist for Asia Pacific at Natixis.
“While the pressure on the yuan may ease as the Fed may finally cut interest rates, there may be sudden and significant movements in capital flows.”
One big reason for the People’s Bank of China (PBOC) to be worried is the build-up of speculative short yuan positions during the currency’s steady decline since early 2023, which could be unwound messily if the currency rises fast.
Foreign companies operating in China, domestic exporters and investors have swapped yuan for dollars to earn better returns in what is known in market circles as the yuan carry trade.
Analysts at the Macquarie Group (OTC:) estimate exporters and multinational companies have accumulated foreign currency holdings of more than $500 billion since 2022.
“As the yuan appreciates… concerns about the potential unwinding of yuan carry trade and shocks to financial markets may arise,” said Zhu Chaoping, global market strategist at J.P. Morgan Asset Management.
“Recent market volatility in Japan might have reminded policymakers about these risks.”
China’s currency regulator, the State Administration of Foreign Exchange (SAFE), and the PBOC did not immediately respond to Reuters requests for comment.
PREVENT A STAMPEDE
Possibly to get an idea of pent-up yuan buying that could come as the currency appreciates, SAFE surveyed banks about their clients’ FX conversion ratio – the proportion of revenues exporters convert into yuan – last week, two people with direct knowledge of the matter told Reuters.
“FX settlement is the issue that everyone in the market is mostly concerned about, besides the Fed rate cut,” said Liu Yang, general manager of the financial market business department at minerals exporter Zheshang Development Group.
“After all, exports are the only major driver of China’s economy among its traditional ‘troika’ (traditional growth engines), and regulators do not want the yuan to appreciate rapidly and substantially to weaken the competitiveness of export products,” he said.
Separately, guidance given to banks last year banning them from keeping short yuan positions at the end of a day’s trading has also been relaxed for some banks, two people with direct knowledge of the matter told Reuters.
Chinese banks have also been given new gold import quotas by the central bank, Reuters reported. Gold imports are usually curtailed when the yuan faces depreciation pressures.
The measures are subtle, analysts said, and together with the trend in the PBOC’s daily benchmark guidance setting for the yuan, simply point to a desire to contain volatility, rather than thwart gains.
Still, market participants are revising their yuan forecasts.
Analysts at BofA Securities expect the yuan will continue to weaken, “given subdued growth and PBOC’s easing bias”, but see the yuan at 7.38 per dollar by year-end, not 7.45 as they had previously forecast. It is currently around 7.14 per dollar.
UBS advised investors to sell any potential short-term gains in the US dollar, adopting a more bearish stance on the currency for the medium term. The firm anticipates a possible corrective rebound in September, particularly if the Federal Reserve’s hesitancy to implement rate cuts greater than 25 basis points aligns with the seasonal trend of the US dollar outperforming during this month.
The current market positioning data indicates that the fast money shorts against the dollar are predominantly in the Euro (EUR) and British Pound (GBP), with both currencies potentially vulnerable in the near term. However, UBS views the GBP as a buy on dips, citing a more supportive domestic rates outlook and historical patterns of a strong recovery in sterling from late October to early November.
In contrast, the Japanese Yen (JPY) positioning is relatively neutral, suggesting the unwinding of short-term yen-funded carry trades. The Yen is also gaining from the return of its inverse correlation with equities, which has elevated it to one of the top performers in the G10 currencies.
Moreover, the Swiss Franc (CHF) has performed well and, without significant intervention from the Swiss National Bank (SNB), is expected to remain supported as residual franc shorts are covered. UBS has set a target for at 0.93.
The firm’s updated cross-border mergers and acquisitions tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but positive for the GBP and JPY. For Australia, the tracker indicates a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, which has reached a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, which is helping to offset a widening current account deficit.
UBS notes that Australian goods export volumes have remained stable, suggesting that the worsening trade balance is due to falling commodity export prices and rising import volumes. However, they believe the impact on the AUD may be limited as the currency did not significantly appreciate during the post-Covid commodity price surge, and the increase in imports may reflect strong domestic demand, which is why UBS maintains a constructive outlook on the AUD.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
BCA Research provided insights into the anticipated monetary policy actions by central banks in China and the United States. The research firm expects Chinese authorities to lower interest rates on existing mortgage loans, while the Federal Reserve is predicted to begin its monetary easing cycle.
According to BCA Research, a potential 100-basis-point cut in Chinese mortgage rates could save homeowners in China approximately RMB 300 billion ($44.7 billion) annually on interest payments.
Despite these potential savings, BCA Research suggests that the impact on China’s broader economy would be limited. The firm points out that subdued consumption is likely to persist due to factors such as weak labor market prospects, slower income growth, and household reluctance to take on new debt.
BCA Research also commented on the recent appreciation of the (RMB), deeming it unsustainable over the next six months. The firm believes that even with the Federal Reserve’s easing, the U.S. economy is not likely to be steered away from a recession. In this context, BCA Research views the U.S. dollar as a counter-cyclical currency that is expected to rebound.
Looking ahead, BCA Research anticipates that a U.S. recession could evolve into a global trade contraction by early 2025. The firm points to China’s economic vulnerability to such a downturn, which could negatively affect the value of the RMB.
Moreover, BCA Research forecasts that China will continue to experience disinflationary or deflationary pressures, necessitating the central bank to keep policy rates low. This environment of low interest rates coupled with modest growth is anticipated to restrain any significant appreciation of the Chinese yuan against the U.S. dollar.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com– Most Asian currencies gained ground on Wednesday as the dollar retreated in the wake of a fiery U.S. presidential debate, with focus turning to key upcoming inflation data due later in the day.
The Japanese yen was among the biggest beneficiaries of this trade, with increased safe haven demand after the debate putting the yen at its strongest level since early-January. The yen also benefited from somewhat hawkish-leaning comments from Bank of Japan officials.
Broader Asian currencies advanced on Wednesday, seeing some relief from a softer dollar. But regional markets were still nursing steep losses over the past week amid waning risk appetite.
Dollar dips after presidential debate; CPI awaited
The and both fell about 0.2% in Asian trade, with losses in the greenback coming in the wake of a fiery presidential debate between Kamala Harris and Donald Trump.
The debate furthered expectations for a hotly contested 2024 presidential race, which could present a major point of uncertainty for markets, given the contrasting views on policy pushed by both candidates. Harris and Trump both veered from the presented topics to engage in personal attacks against each other.
The dollar was also on the backfoot ahead of key inflation data due later in the day, which is widely expected to provide more cues on interest rates.
The reading comes just a week before a , where investors expect the central bank to cut rates by at least 25 basis points.
Japanese yen at 8-mth high on safe haven demand, BOJ hawkspeak
The yen was the best performer in Asia, with the pair falling 0.8% to 141.38 yen- its lowest level since early-January.
The currency benefited from some safe haven plays, as uncertainty over the U.S. election ramped up after Tuesday’s debate.
But a main point of support for the yen was hawkish comments from BOJ member Junko Nakagawa, who said that the central bank will continue to raise interest rates if inflation moves in line with its forecast.
Nakagawa’s comments come following a slew of hawkish signals from the BOJ, and were also made just a week before a BOJ meeting. Investors are uncertain over another rate hike by the central bank, following a 15 basis point raise in late-July.
Broader Asian currencies advanced, albeit slightly, as focus turned to the upcoming U.S. CPI reading.
The Chinese yuan’s pair fell 0.1%, but the yuan remained on the backfoot as U.S. policymakers proposed several more trade restrictions against Beijing.
The South Korean won’s pair fell 0.3%, while the Singapore dollar’s pair shed 0.2%.
The Indian rupee’s pair steadied near 84 rupees, while the Australian dollar’s pair was flat after sliding from over nine-month highs over the past week.
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